NextCard heads for bankruptcy

The former online credit card issuer files for Chapter 11 bankruptcy protection after laying off nearly half of its staff.

15 November 200212:50 am GMT

Former credit card company NextCard on Thursday filed for Chapter 11 bankruptcy, two weeks after laying off nearly half of its staff and shuttering its Web site.

The changes followed the termination of a contract between the company and the Federal Deposit Insurance Corporation (FDIC) at the end of last month. Federal regulators had been paying NextCard, which used to offer credit cards online, to provide customer service for former cardholder accounts.

The FDIC de-activated hundreds of thousands of NextCard credit cards in July.

"(NextCard) filed a voluntary petition for bankruptcy protection," the company said in a regulatory filing with the Securities and Exchange Commission on Thursday. The company "continues to maintain its assets, operate its business and manage its affairs as a debtor-in-possession under the jurisdiction of the bankruptcy court and in accordance with the applicable provisions of the bankruptcy code."

Backed by Amazon.com, NextCard was once one of many upstart Internet companies that sought to upset more traditional players in the financial world. The company counted on the Internet to reduce costs related to issuing cards and serving customers.

But NextCard has been all but defunct since February, when federal regulators shut down its NextBank subsidiary, which issued its credit cards. The FDIC sold off about 200,000 NextBank accounts to Utah-based Merrick Bank in July.

Unable to find a buyer for the company's remaining 800,000 accounts, the FDIC deactivated them a week later, turning them over to a trust managed by the Bank of New York.

The FDIC has estimated that the NextBank shutdown cost the regulatory body between $300 million and $400 million.

Since NextBank closed, NextCard has limped along. Last month, it reported that it had asked former CEO John Hashman to repay $132,500 in loans and interest.

In September, the company said that it was being investigated by the SEC.

Jumping ship
In its regulatory filing Thursday, NextCard said that directors Safi Qureshey and Jack Antonini both resigned from the company's board late last month. Hashman, whose resignation as CEO was accepted by the board in September, followed up by leaving NextCard's board on Oct. 24, according to an SEC filing earlier this month.

In his letter of resignation, Hashman accused NextCard's board of "improperly" excluding him from meetings. Hashman also said that he disagreed with the board's decision on his loans, saying that the only security on the loans were stock grants that were awarded to him.

"Although I do not agree with the company's position in this regard, I am interested in settling this matter quickly in the interest of our shareholders and others," Hashman said in the letter, which was disclosed in NextCard's regulatory filing earlier this month.

NextCard laid off 18 employees on Oct. 31, the same day that the FDIC terminated its service contract with the company. In February, NextCard laid off 90 percent of its work force after NextBank was shut down.

NextCard shuttered its Web site at the end of October, Bob Linderman, the company's general counsel, said earlier this week.

Customers who still owe balances on their NextCard accounts and whose accounts were turned over to the trust still must pay off or transfer their balances, said David Barr, an FDIC spokesman. Of the 800,000 accounts transferred to the trust in July, about 600,000 had an outstanding balance, Barr said. The total amount owed on those accounts was about $1.5 billion, he said.

Although the FDIC encouraged other credit card issuers to try to recruit NextCard customers to transfer their accounts, the effort was largely unsuccessful. Only about $36 million in balances were transferred while the FDIC was overseeing NextCard's operations, Barr said.

Barr did not how many of those accounts have since been paid off or how much of that balance had since been transferred to other credit cards. Representatives of the Bank of New York were not immediately available for comment.